Cause of Lending Slump Sought

CREDIT crunch. That revived phrase has stirred up something of a storm in economic and financial circles. Federal Reserve Board chairman Alan Greenspan uses it to refer to the reluctance of commercial banks to lend money to businesses at this time. In effect, he partly blames the recession on this ``credit crunch.''

That prompts a guffaw from economist Allan Meltzer. ``The biggest bunch of nonsense I have heard in years,'' says the University of Pittsburgh economist. He charges that the economic slump is the result of a ``credit squeeze'' engineered by the Fed, not of a credit crunch imposed by commercial banks.

Though the debate may sound esoteric, economists see the availability of more credit as crucial to an upturn in economic activity. Unless businessmen get money to use, they won't create the new jobs that will end the recession.

``If the Fed does not soon ... start pushing liquidity into the system, I may change my forecast from major recession to depression,'' says Robert Parks, an economic consultant to institutional investors. ``It is a dangerous situation.'' Parks says it is the first time in 26 years on Wall Street that he's talked of ``the big D.''

Professor Meltzer expects only a moderate recession. Explaining his contention that the nation is not suffering from a credit crunch, he notes that interest rates are falling and banks are investing any money they have. Commercial banks, he says, have essentially zero excess reserves and are investing any funds available.

``The problem is the Fed is not providing enough reserves to the banks,'' he says.

Though the banks may be putting less money into real estate loans, leveraged buyouts, or commercial loans, for which risks can be high, they put any spare cash into Treasury securities, notes Meltzer. And the sellers of those securities then have extra money which may well be spent on goods and services - helping economic recovery.

But to Dr. Greenspan, the bank credit crunch itself is one factor in the recession. In testimony to Congress last month, he indicated that if the banks did not start lending more actively, the Fed could encourage them to do so by reducing interest rates, lowering the portion of deposits banks must hold in reserve, and shrinking the proportion of real estate loans that must be regarded as ``nonperforming'' on bank financial statements.

Last Friday, the Fed did lower interest rates. It cut the discount rate - the interest it charges on loans to commercial banks - to 6 percent from 6.5 percent. And it bought enough government securities on the financial markets to reduce the federal funds rate which banks charge each other on overnight loans to about 6.25 percent from 6.75 percent. Most major commercial banks followed by dropping the prime interest rate they charge their better customers to 9 percent from 9.5 percent.

Martin Barnes, an economist with the Bank Credit Analyst, a financial advisory publication in Montreal, sees ``an essence of truth'' in the credit crunch argument. ``But it is very difficult to determine how big a problem it is and how big a factor it plays in the recession,'' he says.

All these economists, Greenspan included, see a need for faster money growth to help pull the economy out of recession. A measure of money known as M2, which includes currency, checking deposits, and money-market accounts, has grown at a slim 1.2 percent annual rate in the last three months and a 2.5 percent rate in the latest six months. That's below or at the lowest point in the 2.5 percent to 6.5 percent range set by the Fed's Open Market Committee. This policymaking body could have altered policy at a meeting in Washington earlier this week.

Dr. Meltzer, who belongs to the monetarist school of economics, would like the Fed to push up money growth to a 4.5 percent annual rate, midway in the Fed's target range.

The credit crunch issue reminds economists of a debate during the Great Depression as to whether or not the central bank can ``push on a string'' - that is, tempt businessmen to borrow when the economy is depressed and good opportunities to invest money appear to have shrunk.

Meltzer regards that view as ``utter blather,'' holding that if the Fed lowers interest rates far enough, customers will flock to banks or other lenders for loans.

Contrariwise, Richard Hoey, an economist with Barclays de Zoete Wedd Inc., New York, worries that borrowers - corporate and individual - will be reluctant to demand new credit because they piled up debt in the 1980s.

``That does not mean the Fed is `pushing on a string,''' he states. ``It does mean that economic recovery is unlikely to be leveraged by strong credit-financed private sector spending growth. Thus there will be a de-leverage drag recovery.'' In other words, he anticipates a full recession ending late this year followed by a somewhat slower recovery than normal from postwar recessions.

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